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Does analysis of the historic behaviour of stock markets around the time of the four-yearly Olympic Games have anything of interest for investors?

The Olympic Games are a major event, often requiring much spending to improve infrastructure; and such spending can provide a fillip to a nation’s economy. If this affects prices on the stock market it is likely to happen soon after the initial announcement of a country winning the competition to host the event – so, long before the Olympics actually take place. The hosts for the Olympic Games are usually announced seven years in advance.

However, in this analysis we will look at the performance of host country stock markets in the year of the Olympics itself.

The following chart shows the performance of stock markets in countries that have recently hosted the Olympics: US (1984, 1996), Australia (2000), Greece (2004), UK (2012). (NB. China was omitted as it hosted the Games in 2008 – a year when stock markets had their focus on other matters; the share price of National Bank of Greece was used as a proxy for the Greek stock market.). The index data has been re-based to start at 100. The Games generally take place in August-September (indicated by the shaded portion in the chart).

There are no easily discernible general trends from the above chart.

To analyse this in some more detail, the following chart plots the average performance for all the markets over three periods:

1 Before games: from 1 January to the start of the games

2 During games: the two-three week period of the games

3 After games: from the end of the games to 31 December

The darker bars show the average performance calculated excluding China and Greece.

Generally, equities in host country markets appear to be weak in the months leading up to the games, perhaps when the media runs stories of cost overruns and missed timetables. And then there appears to be a relief rally afterwards.

Note:

A recent academic paper analysed the performance of stocks for two hosting countries: China in 2008 and the UK in 2012. The paper summarised its findings as-

Olympic “euphoria” is sufficient in both China and the UK to influence stock returns and valuations but the overall fundamental benefits of the Olympics are small.

The following chart plots the annual returns of the FTSE All-Share Index since 1900.

[NB. The values for 1973 and 1974 were respectively -55% and 136%, and have been truncated in the chart to make the scale more useful.]

The Index is currently 2.3% below its starting value for the year. If the Index ends the year in negative territory it will be the second successive year the UK equity market will have fallen.

As can be seen from the chart, this is a fairly rare occurrence. The previous time the market fell in two successive years was during the aftermath of the internet bubble, and before that in 1972-73.

The following chart plots the frequency distribution of the annual returns of the FTSE All-Share Index since 1900. For example, the annual return for the Index has been in the range 5%-10% for 15 years since 1900.

The following table shows the 13 FTSE All-Share stocks that have had the highest number of consecutive negative annual returns to end 2014. The last column gives the number of years of consecutive negative returns.

For example, First Group has not had an up year since 2007, and so has had seven consecutive years of negative returns up to 2014.

The following table shows the seven FTSE All-Share stocks that have had the highest number of consecutive positive annual returns to end 2014. The last column gives the number of years of consecutive positive returns.

For example, Dechra Pharmaceuticals has not had a down year since 2003, and so has had 12 consecutive years of positive returns up to 2014.

Company

TIDM

Index

Consec +ve Yrs

Dechra Pharmaceuticals

DPH

FTSE Mid 250

12

Compass Group

CPG

FTSE 100

9

Worldwide Healthcare Trust

WWH

FTSE Mid 250

8

Booker Group

BOK

FTSE Mid 250

8

Barr (A G)

BAG

FTSE Mid 250

7

Biotech Growth Trust (The)

BIOG

FTSE Small Cap

7

BTG

BTG

FTSE Mid 250

7

After these seven stocks, there have been 34 FTSE All-Share stocks that have had positive annual returns for the past six years.

Equity and commodity markets

The following chart shows the returns on a range of international stock markets and commodities in 2013.

A few notes-

Japan was easily the strongest market in this selection in 2013 (+56.7%)

The FTSE 100 was the weakest of the G7 markets here.

Not a good year for the BRICS.

Currency markets

The following chart shows a sample of currency moves against the British pound in the year. For example, the British pound increased 25.4% against the South African Rand, and fell in value 2.1% against the Euro.

Equity and commodity markets (sterling)

The following chart shows the returns on the same range of markets shown in the first chart, but this time in sterling terms (i.e. showing the currency-adjusted returns for a UK investor). The order of the markets has been kept the same as in the first chart.

Some notes-

UK investors would have seen a return in the Nikkei 225 of 26.6% (down from 56.7% after adjusting for the large fall in the yen against sterling).

The strongest sterling-adjusted market in 2013 in this selection was Nasdaq (+35.7%).

The second strongest market was the FTSE 250.

In domestic currency terms the Australian market rose 15.1% in 2013, but UK investors would have experienced a loss of 3.1% in this market as sterling increased 18.8% against the Aussie dollar.

Except for China, the losses in the BRIC markets were exacerbated by the strength of sterling against their currencies. For example, a domestic currency loss of 15.5% in the Brazilian market became a 28.0% loss for UK investors in that market…

…and the same for gold and silver as sterling appreciated against the US dollar in the year.

We’ve come across three different uses of the term. A quick overview follows.

1. Small-caps out-perform large caps in January

The most common use of the term January Effect describes the tendency of small-cap stocks to out-perform large-cap stocks in January.

In 1976 an academic paper found that equally weighted indices of all the stocks on the NYSE had significantly higher returns in January than in the other 11 months during 1904-1974. This indicated that small capitalisation stocks out-performed larger stocks in January. Over the following years many further papers were written confirming this finding. In 2006 a paper tested this effect on data from 1802 and found the effect was consistent up to the present time.

The UK market experiences the same January Effect as seen in the US market. The small cap out-performance in January is significantly strong: the FTSE Small Cap Index has out-performed the FTSE 100 Index by an average 3.7 percentage points in all Januaries since year 2000. And the small cap index has under-performed the FTSE 100 Index in just one year in the past 13.

The following chart shows the average FTSE Small Cap Index out-performace of the FTSE 100 Index for each month since 2000.

2. January predicts the market for rest of the year

Historically, the returns in January have signaled the returns for the rest of the year. If January market returns are positive, then returns for the whole year have tended to be positive (and vice versa).

This is sometimes called the other January effect, or January Predictor or January Barometer and was first mentioned by Yale Hirsch of the Stock Traders Almanac in 1972. A variant of this effect has it that returns for the whole year can be predicted by the direction of the market in just the first five days of the year.

Academic research has largely found that January returns can predict the rest of the year, but there is some doubt as to whether the effect can be exploited.

And Dan Greenhaus of BTIG points out that January is not necessarily any better a predictor of full year performance than any other month. According to him,

When February is down, the 12 month return inclusive of that February is 2.0%. When February is up, the S&P 500 returns 12.53%

Looking at the returns for the FTSE 100 Index since 1984, it is true that they tend to be positive – but not strongly so. The index has risen in 57% of all Januaries since 1984 with an average increase of 0.3% – which ranks it in eighth place of the 12 months.